Notes to Consolidated Financial Statements (Unaudited)
Unless indicated otherwise, the terms "Company," "we," "us," and "our" refer to Ascent Industries Co. and its consolidated subsidiaries.
Note 1: Basis of Presentation
Basis of Financial Statement Presentation
The accompanying unaudited condensed consolidated financial statements and notes to the unaudited condensed consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all the disclosures normally required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The unaudited condensed consolidated financial statements, in the opinion of management, contain all normal recurring adjustments necessary to present a fair statement of the condensed consolidated balance sheets as of September 30, 2024, the statements of income (loss) and shareholders’ equity for the three and nine months ended September 30, 2024 and 2023, and the statements of cash flows for the nine months ended September 30, 2024 and 2023. The December 31, 2023 condensed consolidated balance sheet was derived from the audited financial statements.
These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 (the "Annual Report"). The financial results for the interim periods may not be indicative of the financial results for the entire year as our future assessment of our current expectations could result in material impacts to our consolidated financial statements in future reporting periods.
Use of Estimates
The preparation of the Company's financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosures of contingent assets and liabilities. Significant items subject to such estimates and assumptions include the carrying value of property, plant and equipment; intangible assets; the fair value of assets or liabilities acquired in a business combination; valuation allowances for receivables, inventories and deferred income tax assets and liabilities; liabilities for potential tax deficiencies; and, potential litigation claims and settlements. The Company bases these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying value of assets and liabilities that are readily available from other sources. Actual results may differ from these estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentation, including the Company's Specialty Pipe and Tube operations within the Tubular Products segment to discontinued operations.
Accounting Pronouncements Not Yet Adopted
In November 2023, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. All disclosure requirements under ASU 2023-07 are also required for public entities with a single reportable segment. The ASU is effective for the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024, and subsequent interim periods, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements and footnote disclosures.
In December 2023, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU requires consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. The amendments also require that all entities disclose more detailed information about income taxes paid, including by jurisdiction; pretax income (or loss) from continuing operations; and income tax expense (or benefit). The ASU is effective for the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2025, and subsequent interim periods, with early
Notes to Consolidated Financial Statements (Unaudited)
adoption permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements and footnote disclosures.
In November 2024, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures. The ASU requires updated disclosures, in the notes to the financial statements, of specified information about certain costs and expenses. The amendments require that at each interim and annual reporting period an entity disclose the amounts of purchases of inventory, employee compensation, depreciation, intangible asset amortization and depreciation, depletion, and amortization recognized as part of oil and gas producing activities included in relevant expense captions. The amendments also require disclosure of qualitative descriptions of amounts remaining in relevant expense captions that are not separately disaggregated and to disclose the total amount of selling expenses as well as the entity's definition of selling expenses. The ASU is effective for the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2027, and subsequent interim periods, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements and footnote disclosures
Recent accounting pronouncements pending adoption not discussed in this Form 10-Q are either not applicable to the Company or are not expected to have a material impact on the Company.
Note 2: Discontinued Operations
Munhall Closure
During the second quarter of 2023, the Board of Directors of the Company made the decision to permanently cease operations at Munhall effective on or around August 31, 2023. The strategic decision to cease manufacturing operations at Munhall is part of the Company’s ongoing efforts to consolidate manufacturing to drive an increased focus on its core operations and to improve profitability while driving operational efficiencies.
As a result of this decision, during the second quarter ended June 30, 2023, the Company incurred asset impairment charges of $6.4 million related to the write down of inventory and long-lived assets as well as $1.4 million in increased reserves on accounts receivable at the facility. During the third quarter of 2023, the Company incurred additional asset impairment charges of $2.4 million related to the write down of inventory to net realizable value. During the first quarter of 2024, the Company incurred additional asset impairment charges of $1.1 million related to the write down of the remaining long-lived assets at the facility. During the third quarter, the Company entered into a purchase agreement to sell the remaining assets at the Munhall facility for approximately $2.8 million. The Company recognized a $1.5 million gain on the sale in the third quarter of 2024. See Note 4 for further discussion of the assets held for sale and related fair value measurements. The results of operations for Munhall have been classified as discontinued operations for all periods presented.
In May of 2023, the Company was named as a defendant in a lawsuit filed in the U.S. District Court for the Western District of Pennsylvania, asserting various claims for breach of contracts resulting in losses to the plaintiff and seeking damages in the amount of $0.8 million plus prejudgment interest and attorney's fees. The Company had an estimated liability of $1.0 million related to the lawsuit as of December 31, 2023. In August of 2024, the Company resolved the case through a settlement agreement and no longer has funds reserved for the matter.
Divestiture of Specialty Pipe & Tube, Inc.
On December 22, 2023, the Company and its wholly-owned subsidiary Specialty Pipe & Tube, Inc. (“SPT”) entered into an Asset Purchase Agreement pursuant to which Ascent and SPT sold substantially all of the assets primarily related to SPT to Specialty Pipe & Tube Operations, LLC, a Delaware limited liability company. The consideration for the transaction was approximately $55 million of cash proceeds subject to certain closing adjustments. The transaction closed on December 22, 2023. Ascent and Purchaser also entered into a Transition Services Agreement (the “TSA”) and an Employee Leasing Agreement (the “ELA”) each dated December 22, 2023, pursuant to which Ascent agreed to provide certain transition services and to lease certain employees to Purchaser immediately after the closing for certain agreed upon transition periods. The TSA and the ELA were both completed as of June 30, 2024. As result of the sale, SPT results of operations are classified under discontinued operations for all periods presented. Prior to the divestiture, SPT was reported under the Company's Tubular Products segment.
The following table presents the aggregate carrying amounts of the classes of assets and liabilities of the Company's discontinued operations:
Notes to Consolidated Financial Statements (Unaudited)
(in thousands)
September 30, 2024
December 31, 2023
Carrying amounts of assets included as part of discontinued operations:
Accounts receivable, net
$
—
$
778
Prepaid expenses and other current assets
56
83
Current assets classified as discontinued operations
56
861
Carrying amounts of current liabilities included as part of discontinued operations:
Accounts payable
9
107
Accrued expenses and other current liabilities
213
1,366
Total current liabilities classified as discontinued operations
$
222
$
1,473
The financial results are presented as loss from discontinued operations, net of tax on the unaudited condensed consolidated statements of income (loss). The following table summarizes the results of the Company's discontinued operations:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Net sales
$
29
$
12,016
$
290
$
57,547
Cost of sales
466
12,974
2,064
56,393
Gross profit
(437)
(958)
(1,774)
1,154
Selling, general and administrative expense
(1,899)
742
(1,758)
6,326
Acquisition costs and other
5
135
124
213
Asset impairments
—
2,416
1,115
8,803
Income (loss) from discontinued operations before income taxes
1,457
(4,251)
(1,255)
(14,188)
Income tax expense (benefit)
593
(997)
7
(3,036)
Net income (loss) from discontinued operations
$
864
$
(3,254)
$
(1,262)
$
(11,152)
Note 3: Revenue Recognition
Revenue is generated primarily from contracts to produce, ship and deliver stainless steel and specialty chemical products. Revenues are recognized when control of the promised goods or services is transferred to our customers upon shipment, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The Company's revenues are derived from contracts with customers where performance obligations are satisfied at a point-in-time or over-time. For certain contracts under which the Company produces product with no alternative use and for which the Company has an enforceable right to payment during the production cycle, product in which the material is customer owned or in which the customer simultaneously consumes the benefits throughout the production cycle, progress toward satisfying the performance obligation is measured using an output method of units produced. Certain customer arrangements consist of bill-and-hold characteristics under which transfer of control has been met (including the passing of title and significant risk and reward of ownership to the customers). Therefore, the customers can direct the use of the bill-and-hold inventory while we retain physical possession of the product until it is shipped to a customer at a point in time in the future.
Sales tax and other taxes we collect with revenue-producing activities are excluded from revenue. Shipping costs charged to customers are treated as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. Costs related to obtaining sales contracts are incidental and are expensed when incurred. Because customers are invoiced at the time title transfers and the Company’s right to consideration is unconditional at that time, the Company does not maintain contract asset balances. Additionally, the Company does not maintain material contract liability balances, as performance obligations for substantially all contracts are satisfied prior to customer payment for product. The Company offers industry standard payment terms.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the Company's revenues, disaggregated by product group from continuing operations:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Fiberglass and steel liquid storage tanks and separation equipment
$
—
$
—
$
—
$
50
Stainless steel pipe and tube
22,023
26,695
74,559
86,748
Specialty chemicals
20,878
20,052
62,642
65,165
Net sales
$
42,901
$
46,747
$
137,201
$
151,963
Performance obligations are supported by contracts with customers, providing a framework for the nature of the distinct goods, services or bundle of goods and services. The timing of satisfying the performance obligation is typically indicated by the terms of the contract. The following table represents the Company's revenue recognized at a point-in-time and over-time:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Point-in-time
$
38,532
$
42,037
$
121,159
$
137,803
Over-time
$
4,369
$
4,710
$
16,042
$
14,160
Note 4: Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
Level 1 - Unadjusted quoted prices that are available in active markets for identical assets or liabilities at the measurement date.
Level 2 - Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
•Quoted prices for similar assets or liabilities in active markets;
•Quoted prices for identical or similar assets or liabilities in non-active markets;
•Inputs other than quoted prices that are observable for the asset or liability; and
•Inputs that are derived principally from or corroborated by other observable market data.
Level 3- Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using model-based techniques, including option pricing models, discounted cash flow models, probability weighted models, and Monte Carlo simulations.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
During the three and nine months ended September 30, 2024, the Company's only significant measurements of assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition were certain long-lived assets.
Long-lived assets
The Company reviews the carrying amounts of long-lived assets whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company assesses performance quarterly against historical patterns, projections of future profitability, and whether it is more likely than not that the assets will be disposed of significantly prior to the end of their estimated useful life for evidence of possible impairment. An impairment loss is recognized when the carrying amount of the asset (disposal) group is not recoverable and exceeds fair value. The Company estimates the fair values of assets subject to long-lived asset impairment based on the Company's own judgments about the assumptions market participants would use in pricing the assets and observable market data, when available.
Notes to Consolidated Financial Statements (Unaudited)
During the second quarter of 2023, the Board of Directors of the Company made the decision to permanently cease operations at the Munhall facility effective on or around August 31, 2023. As a result of this decision, it was determined to be more likely than not that the assets of Munhall would be sold or otherwise disposed of significantly before the end of their previously estimated useful lives, and therefore, experienced a triggering event and were evaluated for recoverability. Based on this evaluation, inventory at Munhall was written down to its net realizable value of $16.0 million and certain long-lived assets, including intangible assets, were written down to their estimated fair value of $2.6 million, resulting in asset impairment charges of $6.4 million in the second quarter of 2023.
During the third quarter of 2023, the remaining inventory at Munhall was written down to its net realizable value of $4.0 million resulting in asset impairment charges of $2.4 million in the third quarter of 2023. During the first quarter of 2024, the Company incurred additional asset impairment charges of $1.1 million related to the write down of the remaining long-lived assets at the facility. See Note 2 for further information on the Company's discontinued operations.
Assets Held for Sale
During the third quarter of 2024, the Company entered into a purchase agreement to sell the remaining assets at the Munhall facility for approximately $2.8 million. The Company recognized a $1.5 million gain on the sale in the third quarter of 2024. As a result of this sale, the Company had no assets held for sale as of September 30, 2024. The Company remains obligated under the terms of the leases for the rent and other costs that may be associated with the lease of the Munhall facility through 2036.
Munhall assets classified as held for sale as are as follows:
(in thousands)
September 30, 2024
December 31, 2023
Property, plant and equipment, net
$
—
$
2,374
Other assets, net
—
538
Assets held for sale
$
—
$
2,912
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, accounts receivable, accounts payable and the Company's note payable approximated their carrying value because of the short-term nature of these instruments. The Company's revolving line of credit and long-term debt, which is based on a variable interest rate, are also reflected in the financial statements at carrying value which approximate fair values as of September 30, 2024. The carrying amount of cash and cash equivalents are considered Level 1 measurements. The carrying amounts of accounts receivable, accounts payable, note payable, revolving line of credit and long-term debt are considered Level 2 measurements. See Note 8 for further information on the Company's debt.
Note 5: Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined by either specific identification or weighted average methods. The components of inventories are as follows:
Notes to Consolidated Financial Statements (Unaudited)
Note 6: Property, Plant and Equipment
Property, plant and equipment from continuing operations consist of the following:
(in thousands)
September 30, 2024
December 31, 2023
Land
$
668
$
723
Leasehold improvements
3,087
3,079
Buildings
1,534
1,534
Machinery, fixtures and equipment
94,766
93,758
Construction-in-progress
1,357
1,330
101,412
100,424
Less: accumulated depreciation and amortization
(74,758)
(70,669)
Property, plant and equipment, net
$
26,654
$
29,755
The following table sets forth depreciation expense related to property, plant and equipment:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Cost of sales
$
1,374
$
1,462
$
4,290
$
4,454
Selling, general and administrative
64
60
199
180
Total depreciation
$
1,438
$
1,522
$
4,489
$
4,634
Note 7: Intangible Assets and Deferred Charges
Intangible Assets
Intangible assets represent the fair value of intellectual, non-physical assets resulting from business acquisitions and are amortized over their estimated useful life using either an accelerated or straight-line method over a period of15 years.
The balance of intangible assets from continuing operations subject to amortization are as follows:
Notes to Consolidated Financial Statements (Unaudited)
Estimated amortization expense related to intangible assets for the next five years are as follows:
(in thousands)
Remainder of 2024
$
372
2025
1,324
2026
1,102
2027
930
2028
786
2029
673
Thereafter
2,193
Deferred Charges
Deferred charges represent debt issuance costs and are amortized over their estimated useful lives using the straight-line method over a period of four years.
The balance of deferred charges subject to amortization are as follows:
(in thousands)
September 30, 2024
December 31, 2023
Deferred charges, gross
$
398
$
398
Accumulated amortization of deferred charges
(369)
(294)
Deferred charges, net
$
29
$
104
Note 8: Debt
Short-term debt
On June 21, 2024, the Company entered into a note payable in the amount of $0.9 million with an interest rate of 3.70% maturing April 1, 2025. The agreement is associated with the financing of a portion of the Company's insurance premiums in the current year. As of September 30, 2024, the outstanding balance was $0.6 million.
Credit Facilities
During the first quarter of 2023, the Company entered into an Amended and Restated Credit Agreement with BMO Harris Bank, N.A. ("BMO") to replace LIBOR with the Secured Overnight Funding Rate ("SOFR").
During the fourth quarter of 2023, the Company entered into a Limited Consent, Second Amendment to Credit Agreement and Omnibus Amendment to Loan Documents with BMO Bank N.A. and the other lenders under the Company’s credit facility (the “Credit Facility Amendment”). The Credit Facility Amendment contains a consent for the SPT divestiture, released the lien on the assets of SPT and removed SPT as a loan party. The Credit Facility Amendment also reduced the maximum revolving loan commitment under the credit facility from $105 million to $80 million, and increased the interest rate for the credit facility from SOFR plus an interest rate margin of between 1.60% and 1.70% to SOFR plus an interest rate margin of between 1.85% and 2.10%, depending on average availability under the credit facility and the Company’s consolidated fixed charge coverage ratio. As required by the Credit Facility Amendment, the Company used the proceeds from the SPT divestiture to prepay in full the term loan in the original principal amount of $5 million under the credit facility and used the remaining proceeds to prepay in part the revolving loans under the credit facility.
The borrowing capacity under the credit facility totals $80.0 million consisting of a $80.0 million revolving line of credit which includes a $17.5 million machinery and equipment sub-limit. The Company had no debt outstanding under its credit facilities as of September 30, 2024 and December 31, 2023.
We have pledged all of our accounts receivable, inventory, and certain machinery and equipment as collateral for the Credit Agreement. Availability under the Credit Agreement is subject to the amount of eligible collateral as determined by the lenders' borrowing base calculations. Amounts outstanding under the revolving line of credit currently bear interest at (a) the Base Rate (as defined in the Credit Agreement) plus 0.75%, or (b) SOFR plus 1.85%. The Credit Agreement also provides an unused commitment fee based on the daily used portion of the credit facility.
Notes to Consolidated Financial Statements (Unaudited)
Pursuant to the Credit Agreement, the Company was required to pledge all of its tangible and intangible properties, including the stock and membership interests of its subsidiaries. The Credit Agreement contains covenants requiring the maintenance of a minimum consolidated fixed charge coverage ratio if excess availability falls below the greater of (i) $7.5 million and (ii) 10% of the revolving credit facility (currently $8.0 million). As of September 30, 2024, the Company was in compliance with all financial debt covenants.
As of September 30, 2024, the Company had $57.5 million of remaining availability under it credit facility.
Note 9: Leases
The Company's portfolio of leases contains both finance and operating leases that relate to real estate and manufacturing equipment. Substantially all of the value of the Company's lease portfolio relates to the Master Lease with Store Master Funding XII, LLC (“Store”), an affiliate of Store Capital Corporation ("Store Capital") that was entered into in 2016 and amended with the American Stainless acquisition in 2019 as well as the sale of land at the Munhall facility in 2020.
During the third quarter of 2024, the Company and Store closed on a transaction pursuant to which Store sold to a third party approximately 20,200 square feet of warehouse space located at Ascent’s facility in Cleveland, Tennessee. As a result of the sale, the Company and Store entered into a Fourth Amended and Restated Master Lease Agreement (the “Fourth Master Lease”) to reduce the Company's rent at the Cleveland facility pursuant to the terms and conditions of the Third Amended and Restated Master Lease Agreement between the parties dated September 10, 2020.
The Fourth Master Lease was determined to be a lease modification that qualified for a remeasurement of the existing lease and not a separate contract. Upon modification of the Fourth Master Lease, the right-of-use asset and operating lease liability were remeasured using an incremental borrowing rate determined on the date of modification. As such, the Company recognized an increase in the right-of-use asset and operating lease liability related to the Fourth Master Lease of $1.3 million and recognized a gain on the modification of $0.1 million, which is reported within operating expenses on the unaudited consolidated statements of income (loss).
As of September 30, 2024, operating lease liabilities related to the master lease agreement with Store Capital totaled $31.2 million, or 94% of the total lease liabilities on the consolidated balance sheet.
On July 16, 2024, the Company entered into a sixty-five month operating lease agreement with respect to certain office property commencing November 1, 2024 with one option to extend an additional sixty months at the end of the lease term. Pursuant to the terms of the lease agreement, the Company will pay a base rent in the first year of the agreement of $9,606 monthly with an annual increase in November each year of 3.0% through the term of the agreement. The total amount of rent and rent adjustments shall be abated for a period of five months from the period commencing November 1, 2024 and expiring March 31, 2025. In addition, the Company remitted a security deposit of $52,353 to the landlord at execution and is also responsible for taxes and other operating expenses related to the space. The Company has treated tenancy for the period prior to rent commencement as a free rental period for accounting purposes.
During the three months and nine months ended September 30, 2024, the Company did not enter into any new finance lease agreements.
Operating and finance lease amounts from continuing operations included in the unaudited condensed consolidated balance sheet are as follows (in thousands):
Classification
Financial Statement Line Item
September 30, 2024
December 31, 2023
Long-term Assets
Right-of-use assets, operating leases
$
28,623
$
27,784
Long-term Assets
Property, plant and equipment
1,303
1,543
Current liabilities
Current portion of lease liabilities, operating leases
1,448
1,140
Current liabilities
Current portion of lease liabilities, finance leases
288
292
Non-current liabilities
Non-current portion of lease liabilities, operating leases
30,433
29,729
Non-current liabilities
Non-current portion of lease liabilities, finance leases
Notes to Consolidated Financial Statements (Unaudited)
Total Lease Cost
Individual components of the total lease cost incurred by the Company are as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Operating lease cost1
$
1,007
$
985
$
2,978
$
2,956
Finance lease cost:
Amortization of right-of-use assets
79
87
237
263
Interest on finance lease liabilities
22
24
65
61
Sublease income
(92)
(91)
(276)
(273)
Total lease cost
$
1,016
$
1,005
$
3,004
$
3,007
1Includes short term leases, which are immaterial
Reduction in carrying amounts of right-of-use assets held under finance leases is included in depreciation expense. Minimum rental payments under operating leases are recognized on a straight-line method over the term of the lease including any periods of free rent and are included in selling, general, and administrative expense on the unaudited condensed consolidated statements of income (loss).
Maturity of Leases
The amounts of undiscounted future minimum lease payments under leases in continuing operations as of September 30, 2024 are as follows:
(in thousands)
Operating
Finance
Remainder of 2024
$
898
$
90
2025
3,698
361
2026
3,750
361
2027
3,825
361
2028
3,903
303
Thereafter
31,937
85
Total undiscounted minimum future lease payments
48,011
1,561
Imputed interest
(16,130)
(184)
Present value of lease liabilities
$
31,881
$
1,377
Lease Term and Discount Rate
Weighted-average remaining lease term
September 30, 2024
December 31, 2023
Operating leases
11.85 years
12.67 years
Finance leases
4.37 years
5.07 years
Weighted-average discount rate
Operating leases
7.17
%
8.33
%
Finance leases
5.93
%
5.92
%
Subleases
During the second quarter of 2024, the Company entered into a sublease agreement with a third party to sublease the former Specialty Pipe and Tube, Inc. facilities in Mineral Ridge, Ohio and Houston, Texas. The sublease agreement continues through the remaining term of the Master Lease Agreement and will expire on September 30, 2036, unless terminated in accordance with the sublease agreement. The sublease provides for an annual base rent of approximately $0.1 million in the first year, which increases on an annual basis by 2.0%. The sublessee is responsible for taxes and all operating expenses related to the subleased space.
Notes to Consolidated Financial Statements (Unaudited)
The Company also currently subleases the former Palmer facility and records cash receipts related to the subleases in other expense (income) on the unaudited condensed consolidated statements of income (loss).
Future expected cash receipts from the Company's subleases as of September 30, 2024 are as follows:
(in thousands)
Sublease Receipts
Remainder of 2024
$
145
2025
582
2026
594
2027
606
2028
618
Thereafter
5,229
Total sublease receipts
$
7,774
Note 10: Shareholders' Equity
On December 20, 2022, the Board of Directors re-authorized the Company's share repurchase program. The previous share repurchase program had a term of 24 months and was set to expire on February 17, 2023. The share repurchase program allows for repurchase of up to 790,383 shares of the Company's outstanding common stock and extends to February 17, 2025. The shares will be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. Under the program, the purchases will be funded from available working capital, and the repurchased shares will be returned to the status of authorized, but unissued shares of common stock or held in treasury. There is no guarantee as to the exact number of shares that will be repurchased by the Company and the Company may discontinue purchases at any time that management determines additional purchases are not warranted. As of September 30, 2024, the Company has 462,685 shares of its share repurchase authorization remaining.
Shares repurchased for the three and nine months ended September 30, 2024 and 2023 were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Number of shares repurchased
42,623
44,799
74,186
95,955
Average price per share
$
9.79
$
8.87
$
9.92
$
9.38
Total cost of shares repurchased1
$
418,563
$
398,861
$
738,361
$
903,012
1Includes broker commissions paid as part of repurchase transactions
Notes to Consolidated Financial Statements (Unaudited)
Note 11: Earnings Per Share
The following table sets forth the computation of basic and diluted income (loss) per share:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands, except per share data)
2024
2023
2024
2023
Numerator:
Net loss from continuing operations
$
(7,016)
$
(14,678)
$
(11,309)
$
(26,615)
Net income (loss) from discontinued operations
864
(3,254)
(1,262)
(11,152)
Net loss
$
(6,152)
$
(17,932)
$
(12,571)
$
(37,767)
Denominator:
Weighted-average common shares outstanding
10,114
10,135
10,111
10,151
Effect of dilutive securities:
Employee stock options and stock grants
—
—
—
—
Weighted-average common shares, as adjusted
10,114
10,135
10,111
10,151
Net loss per share from continuing operations:
Basic
$
(0.69)
$
(1.45)
$
(1.12)
$
(2.62)
Diluted
$
(0.69)
$
(1.45)
$
(1.12)
$
(2.62)
Net income (loss) per share from discontinued operations:
Basic
$
0.08
$
(0.32)
$
(0.12)
$
(1.10)
Diluted
$
0.08
$
(0.32)
$
(0.12)
$
(1.10)
Net loss per share:
Basic
$
(0.61)
$
(1.77)
$
(1.24)
$
(3.72)
Diluted
$
(0.61)
$
(1.77)
$
(1.24)
$
(3.72)
The diluted loss per share calculations exclude the effect of potentially dilutive shares when the inclusion of those shares in the calculation would have an anti-dilutive effect. The Company had $0.1 million shares that were anti-dilutive for the three and nine months ended September 30, 2024 and 2023, respectively.
Note 12: Income Taxes
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company is no longer subject to U.S. federal examinations for years before 2020 or state examinations for years before 2019. During the three and nine months ended September 30, 2024 and 2023, the Company did not identify nor reserve for any unrecognized tax benefits.
Our income tax expense (benefit) and overall effective tax rates for continuing operations for the periods presented are as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Income tax benefit
$
7,479
$
(1,380)
$
6,270
$
(4,680)
Effective income tax rate
1,612.2
%
8.6
%
124.4
%
15.0
%
The effective tax rate for continuing operations was 1,612.2% and 124.4% for the three and nine months ended September 30, 2024. The three and nine months ended September 30, 2024 effective tax rate was higher than the U.S. statutory rate of 21.0% primarily due to discrete tax charges associated with the recording of a valuation allowance on cumulative U.S. federal and
Notes to Consolidated Financial Statements (Unaudited)
state deferred tax assets. During the period, the Company determined it was more likely than not that the existing cumulative deferred tax assets would be unrealizable and recorded a discrete tax charge of $6.2 million.
The effective tax rate for continuing operation was 8.6% and 15.0% for the three and nine months ended September 30, 2023. The three and nine months ended September 30, 2023 effective tax rate was lower than the U.S. statutory rate 21.0% primarily due to the effects of permanent goodwill impairment reducing the tax benefit in the period.
Note 13: Commitments and Contingencies
From time to time, we are involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any other such litigation the outcome of which, we believe, if determined adversely to us, would individually, or taken together, have a material adverse effect on our business, operating results, cash flows, or financial condition. Defending such proceedings is costly and can impose a significant burden on management and employees. We may receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurances that favorable final outcomes will be obtained.
Note 14: Industry Segments
Ascent Industries Co. has two reportable segments: Specialty Chemicals and Tubular Products. The Specialty Chemicals segment includes the operating results of the Company’s plants involved in the production of specialty chemicals. The Specialty Chemicals segment produces products for the pulp and paper, coatings, adhesives, sealants and elastomers (CASE), textile, automotive, household, industrial and institutional ("HII"), agricultural, water and waste-water treatment, construction, oil and gas and other industries.
The Tubular Products segment includes the operating results of the Company’s plants involved in the production of stainless steel pipe and tube. The Tubular Products segment serves markets through pipe and tube and customers in the appliance, architectural, automotive and commercial transportation, brewery, chemical, petrochemical, pulp and paper, mining, power generation (including nuclear), water and waste-water treatment, liquid natural gas ("LNG"), food processing, pharmaceutical, oil and gas and other industries.
On December 22, 2023, the Company announced the sale of substantially all of the assets of Specialty Pipe & Tube (“SPT”). As a result, certain prior period Tubular Products segment results have been reclassified to remove SPT’s results from continuing operations to discontinued operations.
The chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the primary measures being operating income and adjusted earnings (loss) before interest, income taxes, depreciation and amortization. Adjusted earnings (loss) before interest, income taxes, depreciation and amortization excludes certain items that management believes are not indicative of future results.
The accounting principles applied at the operating segment level are the same as those applied at the consolidated financial statement level. Intersegment sales and transfers are eliminated at the corporate consolidation level.
Notes to Consolidated Financial Statements (Unaudited)
The following table summarizes certain information regarding segments of the Company's continuing operations:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Net sales
Tubular Products
$
22,023
$
26,695
$
74,559
$
86,748
Specialty Chemicals
20,878
20,052
62,642
65,165
All Other
—
—
—
50
$
42,901
$
46,747
$
137,201
$
151,963
Operating income (loss)
Tubular Products
$
1,653
$
(620)
$
1,040
$
(7,215)
Specialty Chemicals
385
(11,481)
(625)
(10,935)
All Other
(117)
(132)
(378)
(684)
Corporate
Unallocated corporate expenses
(1,490)
(2,859)
(5,070)
(9,314)
Acquisition costs and other
(2)
—
(53)
(274)
Gain on lease modification
67
—
67
—
Total Corporate
(1,425)
(2,859)
(5,056)
(9,588)
Operating income (loss)
496
(15,092)
(5,019)
(28,422)
Interest expense, net
124
1,063
323
3,217
Other, net
(91)
(97)
(303)
(344)
Income (loss) from continuing operations before income taxes
$
463
$
(16,058)
$
(5,039)
$
(31,295)
As of
(in thousands)
September 30, 2024
December 31, 2023
Identifiable assets
Tubular Products
$
64,571
$
70,548
Specialty Chemicals
43,905
49,547
Corporate and other
40,084
42,339
$
148,560
$
162,434
Note 15: Subsequent Events
On November 6, 2024, Ascent entered into a Limited Consent, Third Amendment to Credit Agreement to Loan Documents with BMO Bank N.A. under Ascent’s credit facility (the “Credit Facility Amendment”). The Credit Facility Amendment reduced the maximum revolving loan commitment under the credit facility from $80 million to $60 million and extended the term of the credit facility through December 31, 2027. The Credit Facility Amendment also increased the interest rate for the credit facility from SOFR plus an interest rate margin of between 1.85% and 2.10% to SOFR plus an interest rate margin of between 1.85% and 2.35%, depending on average availability under the credit facility and Ascent’s consolidated fixed charge coverage ratio.
Pursuant to the Credit Facility Amendment, the Company was required to pledge all of its tangible and intangible properties, including the stock and membership interests of its subsidiaries. The Credit Facility Amendment contains covenants requiring the maintenance of a minimum consolidated fixed charge coverage ratio if excess availability falls below the greater of (i) $6.0 million and (ii) 15% of the revolving credit facility. The borrowing capacity under the amended credit facility totals $60.0 million consisting of a $60.0 million revolving line of credit which includes a $7.7 million machinery and equipment sub-limit. The Company had no debt outstanding under its credit facilities as of November 6, 2024.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis summarizes the significant factors affecting our consolidated operating results, liquidity, and capital resources during the three and nine months ended September 30, 2024 and 2023, respectively. We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that are included in our Annual Report on Form 10-K for the year ended December 31, 2023 (the Annual Report), as well as the condensed consolidated financial statements (unaudited) and notes to the condensed consolidated financial statements (unaudited) contained in this report. Unless otherwise specified, all comparisons made are to the corresponding period of 2023. This discussion and analysis is presented in five sections:
•Executive Overview
•Results of Operations and Non-GAAP Financial Measures
•Liquidity and Capital Resources
•Material Cash Requirements from Contractual and Other Obligations
Ascent Industries Co. is a diverse industrials company focused on the production of specialty chemicals and industrial tubular products. Ascent Industries Co. was incorporated in 1958 as the successor to a chemical manufacturing business founded in 1945 known as Blackman Uhler Industries Inc.
The Company's business is divided into two reportable operating segments, Specialty Chemicals and Tubular Products. The Specialty Chemicals segment produces specialty products for the pulp and paper, coatings, adhesives, sealants and elastomers (CASE), textile, automotive, household, industrial and institutional ("HII"), agricultural, water and waste-water treatment, construction, oil and gas and other industries. The Tubular Products segment serves markets through pipe and tube production and customers in the appliance, architectural, automotive and commercial transportation, brewery, chemical, petrochemical, pulp and paper, mining, power generation (including nuclear), water and waste-water treatment, liquid natural gas ("LNG"), food processing, pharmaceutical, oil and gas and other industries.
Munhall Closure
During the second quarter of 2023, the Board of Directors of the Company made the decision to permanently cease operations at Munhall effective on or around August 31, 2023. This strategic decision is part of the Company’s ongoing efforts to consolidate manufacturing to drive an increased focus on its core operations and to improve profitability while driving operational efficiencies. Munhall results are included within discontinued operations in all periods presented.
Divestiture of Specialty Pipe & Tube, Inc.
On December 22, 2023, the Company and its wholly-owned subsidiary Specialty Pipe & Tube, Inc. (“SPT”) entered into an Asset Purchase Agreement pursuant to which Ascent and SPT sold substantially all of the assets primarily related to SPT to Specialty Pipe & Tube Operations, LLC, a Delaware limited liability company. The consideration for the transaction was approximately $55 million of cash proceeds subject to certain closing adjustments. The transaction closed on December 22, 2023. As result of the sale, SPT results of operations are classified under discontinued operations for all periods presented. Prior to the divestiture, SPT was reported under the Company's Tubular Products segment. The discussion and analysis of our results of operations refers to continuing operations unless noted.
Macroeconomic Events
Macroeconomic and inflationary pressures have negatively impacted our revenue, operating margins and net income in 2023 and 2024 to date, including increased pricing pressures within both segments of our business. During the quarter, we continued to see demand fluctuations in our end user markets resulting in decreases in volume year over year and sequentially from the second quarter, however, we continue to focus on stabilization initiatives centered around pricing and product mix optimization, strategic sourcing, labor and overhead improvements and working capital which has allowed us to achieve three consecutive quarters of positive margin expansion and setting the foundation for future growth. The ongoing factors driving volatility in global markets that could impact our business' earnings and cash flows include, but are not limited to, the misalignment of supply and demand for labor, energy, raw materials and other inputs, the inflation of (or unavailability of) raw material inputs and transportation and logistics services, currency fluctuations, interest rates and extreme weather, the purchasing of commodities and relative commodity prices. The Company continues efforts to offset these inflationary pressures and continues to implement initiatives to improve working capital and evaluate other opportunities to maintain and improve financial performance in the short and long term, however, if these inflationary and demand pressures continue, our revenue, gross and operating margins and net income (loss) will continue to be impacted for the remainder of 2024.
Results of Operations
Consolidated Performance Summary
Consolidated net sales for the third quarter of 2024 were $42.9 million, a decrease of $3.8 millions, or 8.2%, compared to net sales for the third quarter of 2023. The decrease in net sales was primarily driven by a 7.3% decrease in average selling prices and a 2.0% decrease in pounds shipped.
Consolidated net sales for the first nine months of 2024 were $137.2 million, a decrease of $14.8 million, or 9.7%, compared to net sales for the first nine month of 2023. The decrease in net sales was primarily driven by a 14.2% decrease in average selling prices partially offset by a 3.0% increase in pounds shipped.
For the third quarter of 2024, consolidated gross profit increased 116.5% to $6.5 million, or 15.1% of sales, compared to a gross profit of $3.0 million, or 6.4% of sales in the third quarter of 2023. For the first nine months of 2024, consolidated gross profit increased 304.2% to $14.8 million, or 10.8% of sales, compared to $3.7 million, or 2.4% of sales in the first nine months
of 2023. The increases in gross profit for the third quarter and first nine months of 2024 were primarily attributable to improved strategic sourcing initiatives and product line management resulting in lower raw material costs as well as labor and overhead improvements.
Consolidated selling, general, and administrative expense (SG&A) for the third quarter of 2024 decreased $0.7 million to $6.0 million, or 14.0% of sales, compared to $6.7 million, or 14.3% of sales in the third quarter of 2023. The decrease in SG&A expense for the third quarter of 2024 was primarily driven by decreases in salaries, wages and benefits and credit losses partially offset by increases in incentive bonus expense.
Consolidated selling, general, and administrative expense (SG&A) for the first nine months of 2024 decreased $0.6 million to $19.9 million, or 14.5% of sales, compared to $20.4 million, or 13.4% of sales in the first nine months of 2023. The decrease in SG&A expense for the first nine months of 2024 was primarily driven by decreases in salaries, wages and benefits and credit losses partially offset by increases in incentive bonus expense and professional fees.
Consolidated operating income in the third quarter of 2024 totaled $0.5 million compared to operating loss of $15.1 million in the third quarter of 2023. Consolidated operating loss in the first nine months of 2024 totaled $5.0 million compared to operating loss of $28.4 million in the first nine months of 2023. The operating income in the third quarter and the operating loss decrease in first nine months of 2024 was primarily driven by the aforementioned increase in gross profit as well as goodwill impairment within the Specialty Chemicals segment in 2023.
Specialty Chemicals
Net sales in the third quarter of 2024 totaled $20.9 million, an increase of $0.8 million, or 4.1%, from the third quarter of 2023. The increase was driven by a 6.1% increase in average selling prices partially offset by a 2.5% decrease in pounds shipped.
Net sales in the first nine months of 2024 totaled $62.6 million, a decrease of $2.5 million, or 3.9%, from the first nine months of 2023. The decrease was driven by a 9.3% decrease in average selling price offset by a 2.7% increase in pounds shipped.
Gross profit for the third quarter of 2024 increased to $3.1 million, or 15.0% of sales, compared to $1.9 million, or 9.3% of sales in the third quarter of 2023. Gross profit for the first nine months of 2024 increased to $7.6 million, or 12.1% of sales, compared to $5.7 million, or 8.8% of sales in the first nine months of 2023. The increases were primarily attributable strategic sourcing initiatives and product line management resulting in lower raw material costs as well as labor and overhead improvements.
SG&A expense for the third quarter of 2024 increased to $2.7 million, or 13.2% of sales, compared to $2.0 million, or 9.8% of sales in the third quarter of 2023. The increase was primarily driven by increases in corporate expense allocation and incentive bonus expense partially offset by decreases in professional fees and credit losses.
SG&A expense for the first nine months of 2024 increased to $8.2 million, or 13.1% of sales, compared to $5.3 million, or 8.1% of sales in the first nine months of 2023. The increase was primarily driven by increases in corporate expense allocation, incentive bonus expense and professional fees partially offset by decreases in credit losses.
Operating income increased to $0.4 million for the third quarter of 2024 compared to operating loss of $11.5 million for the third quarter of 2023. The current year increase in operating income was primarily driven by the aforementioned increases in gross profit and reduction in prior year goodwill impairment partially offset by increases in SG&A expenses.
Operating loss decreased to $0.6 million for the first nine months of 2024 compared to operating loss of $10.9 million for the first nine months of 2023. The current year decrease in operating loss was primarily driven by the aforementioned increases in gross profit and reduction in prior year goodwill impairment partially offset by increases in SG&A expenses.
Tubular Products
Net sales in the third quarter of 2024 totaled $22.0 million, a decrease of $4.7 million, or 17.5%, from the third quarter of 2023. The decrease was primarily driven by a 17.2% decrease in average selling prices and a 1.0% decrease in pounds shipped.
Net sales in the first nine months of 2024 totaled $74.6 million, a decreaseof $12.2 million, or 14.1%, from the first nine months of 2023. The decrease was primarily driven by a 18.5% decrease in average selling prices partially offset by a 4.2% increase in pounds shipped.
For the third quarter of 2024, gross profit increased 177.6% to $3.5 million, or 15.7% of sales, compared to a gross profit of $1.2 million, or 4.7% of sales in the third quarter of 2023. For the first nine months of 2024, gross profit increased 592.1% to $7.6 million, or 10.2% of sales, compared to a gross loss of $1.6 million, or (1.8)% of sales in the first nine months of 2023. The increase for the third quarter and first nine months of 2024 was primarily attributable to strategic sourcing measures and product line management resulting in lower raw material costs as well as labor and overhead improvements.
SG&A expense for the third quarter of 2024 decreased to $1.8 million, or 8.2% of sales, compared to $1.9 million, or 7.0% of sales, in the third quarter of 2023. SG&A expense for the first nine months of 2024 increased to $6.6 million, or 8.8% of sales, compared to $5.7 million, or 6.5% of sales, in the first nine months of 2023. The change in the third quarter and year to date SG&A was primarily driven by increases in corporate expense allocation partially offset by decreases in salaries, wages and benefits, credit losses and professional fees.
Operating income increased to $1.7 million for the third quarter of 2024 compared to an operating loss of $0.6 million for the third quarter of 2023. The current year increase in operating income was primarily driven by the aforementioned increase in gross profit.
Operating income increased to $1.0 million for the first nine months of 2024 compared to an operating loss of $7.2 million for the first nine months of 2023. The current year decrease in operating loss was primarily driven by the aforementioned increase in gross profit partially offset by increases in SG&A expense.
Corporate & Other Items
Unallocated corporate and other expenses for the third quarter of 2024 decreased $1.4 million, or 46.2%, to $1.6 million, or 3.7% of sales, compared to $3.0 million, or 6.4% of sales, in the prior year. The third quarter of 2024 decrease was primarily driven by increases in corporate allocation expenses partially offset by increases in salaries, wages and benefits, professional fees, taxes and licenses and insurance expense.
Unallocated corporate and other expenses for the first nine months of 2024 decreased $4.6 million, or 45.8%, to $5.4 million, or 4.0% of sales, compared to $10.0 million, or 6.6% of sales, in the prior year. The first nine months of 2024 decrease was primarily driven by increases in corporate allocation expense as well as decreases in salaries, wages and benefits and stock compensation expense, partially offset by increases in incentive bonus expense, taxes and licenses and insurance expense.
Interest expense for the third quarter of 2024 decreased to $0.1 million, from $1.1 million for the third quarter of 2023. Interest expense for the first nine months of 2024 decreased to $0.3 million, from $3.2 million for the first nine months of 2023. The decrease is primarily related to lower outstanding debt in the current year compared to the prior year.
The effective tax rate for continuing operations was 1,612.2% and 124.4% for the three and nine months ended September 30, 2024. The three and nine months ended September 30, 2024 effective tax rate was higher than the U.S. statutory rate of 21.0% primarily due to discrete tax charges associated with the recording of a valuation allowance on cumulative U.S. federal and state deferred tax assets. During the period, the Company determined it was more likely than not that the existing cumulative deferred tax assets would be unrealizable and recorded a discrete tax charge of $6.2 million.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States ("GAAP"), we use the following non-GAAP financial measures: EBITDA and Adjusted EBITDA. Management believes that these non-GAAP measures are useful because they are key measures used by our management team to evaluate our operating performance, generate future operating plans and make strategic decisions as well as allow readers to compare the financial results between periods. Non-GAAP measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company's results or financial condition as reported under GAAP.
EBITDA and Adjusted EBITDA
We define "EBITDA" as earnings before interest, income taxes, depreciation and amortization. We define "Adjusted EBITDA" as EBITDA further adjusted for the impact of non-cash and other items we do not consider in our evaluation of ongoing performance. These items include: goodwill impairment, asset impairment, gain on lease modification, stock-based compensation, non-cash lease cost, acquisition costs and other fees, shelf registration costs, loss on extinguishment of debt,
retention costs and restructuring and severance costs from net income. We caution investors that amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by other companies because not all companies calculate EBITDA and Adjusted EBITDA in the same manner. We present EBITDA and Adjusted EBITDA because we consider them to be important supplemental measures of our performance and investors' understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations.
Consolidated EBITDA and Adjusted EBITDA from continuing operations are as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
($ in thousands)
2024
2023
2024
2023
Consolidated
Net loss from continuing operations
$
(7,016)
$
(14,678)
$
(11,309)
$
(26,615)
Adjustments:
Interest expense
124
1,063
323
3,217
Income taxes
7,479
(1,380)
6,270
(4,680)
Depreciation
1,438
1,522
4,489
4,634
Amortization
372
376
1,116
1,128
EBITDA
2,397
(13,097)
889
(22,316)
Acquisition costs and other
5
—
83
277
Goodwill impairment
—
11,389
—
11,389
Gain on lease modification
(67)
—
(67)
—
Stock-based compensation
55
134
158
371
Non-cash lease expense
60
63
171
190
Retention expense
—
6
4
6
Restructuring and severance cost
—
—
208
90
Adjusted EBITDA
$
2,450
$
(1,505)
$
1,446
$
(9,993)
% of sales
5.7
%
(3.2)
%
1.1
%
(6.6)
%
Specialty Chemicals EBITDA and Adjusted EBITDA are as follows:
Tubular Products EBITDA and Adjusted EBITDA from continuing operations are as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
($ in thousands)
2024
2023
2024
2023
Tubular Products
Net income (loss) from continuing operations
$
1,653
$
(620)
$
1,040
$
(7,215)
Adjustments:
Depreciation
476
558
1,566
1,717
Amortization
198
218
594
653
EBITDA
2,327
156
3,200
(4,845)
Acquisition costs and other
3
—
29
—
Stock-based compensation
—
2
11
(15)
Non-cash lease expense
25
31
75
93
Restructuring and severance costs
—
—
31
84
Tubular Products Adjusted EBITDA
$
2,355
$
189
$
3,346
$
(4,683)
% of segment sales
10.7
%
0.7
%
4.5
%
(5.4)
%
Liquidity and Capital Resources
We closely manage our liquidity and capital resources. Our liquidity requirements depend on key variables, including level of investment required to support our business strategies, the performance of our business, capital expenditures, credit facilities and working capital management. Capital expenditures and share repurchases are a component of our cash flow and capital management strategy which we can adjust in response to economic and other changes in our business environment. We have a disciplined approach to capital allocation focusing on priorities that support our business and growth.
Sources of Liquidity
Funds generated by operating activities supplemented by our available cash and cash equivalents and our credit facilities are our most significant sources of liquidity. As of September 30, 2024, we held $8.5 million of cash and cash equivalents, as well as $57.5 million of remaining available capacity on our revolving line of credit. We believe our sources of liquidity will be sufficient to fund operations and anticipated capital expenditures as well as repay our debt obligations as they become due over the next 12 months and beyond.
Cash Flows
Cash flows from continuing operations were as follows:
Nine Months Ended September 30,
(in thousands)
2024
2023
Total cash provided by (used in):
Operating activities
$
7,445
$
4,002
Investing activities
(1,281)
(2,411)
Financing activities
(678)
(19,433)
Net increase (decrease) in cash and cash equivalents
$
5,486
$
(17,842)
Operating Activities
The increase in cash provided by operating activities for the nine months ended September 30, 2024, compared to cash provided by operating activities in the nine months ended September 30, 2023, was primarily driven changes in working capital partially offset by decreases in net losses year over year. Changes in working capital can vary significantly depending on factors such as the timing of inventory production and purchases, customer payments of accounts receivable and payments to vendors in the regular course of business. Inventory increased operating cash flows for the first nine months of 2024 by $8.0 million compared to an increase of $5.9 million for the first nine months of 2023, while accounts payable decreased operating cash flows by $4.2 million for the first nine months of 2024, compared to an $8.9 million increase in the first nine months of
2023. The changes in inventory and accounts payable is primarily driven by lower inventory purchases to match inventory levels with sales, partially offset by higher inventory turns year-over-year and decreases in days payables outstanding on a nine-month average basis. Accounts receivable decreased operating cash flows by $1.3 million in the first nine months of 2024 compared to a $3.8 million increase in the first nine months of 2023. The decrease in cash generated by accounts receivable is primarily driven by a decrease in sales partially offset by a decrease in days sales outstanding compared to the first nine months of 2023.
Investing Activities
Net cash used in investing activities primarily consists of transactions related to capital expenditures. The decrease in cash used in investing activities for the nine months ended September 30, 2024 compared to the cash used in investing activities for the nine months ended September 30, 2023 was driven by decreases in capital expenditures in the current year compared to the prior year.
Financing Activities
Net cash used in financing activities primarily consists of transactions related to our long-term debt. The decrease in cash used in financing activities for the nine months ended September 30, 2024 compared to cash used in financing activities for the nine months ended September 30, 2023 was primarily driven by decreased total borrowings and repayments under the Company's credit facility compared to the prior year.
Short-term Debt
The Company has a note payable in the amount of $0.9 million with an annual interest rate of 3.70% maturing April 1, 2025, associated with the financing of the Company's insurance premium in 2024. As of September 30, 2024, the outstanding balance was $0.6 million.
Long-term Debt
During the fourth quarter of 2023, the Company entered into a Limited Consent, Second Amendment to Credit Agreement and Omnibus Amendment to Loan Documents with BMO Bank N.A. and the other lenders under the Company’s credit facility (the “Credit Facility Amendment”). The Credit Facility Amendment contains a consent for the SPT divestiture, released the lien on the assets of SPT and removed SPT as a loan party. The Credit Facility Amendment also reduced the maximum revolving loan commitment under the credit facility from $105 million to $80 million, and increased the interest rate for the credit facility from SOFR plus an interest rate margin of between 1.60% and 1.70% to SOFR plus an interest rate margin of between 1.85% and 2.10%, depending on average availability under the credit facility and the Company’s consolidated fixed charge coverage ratio. The Company had no debt outstanding under its credit facilities as of September 30, 2024 and December 31, 2023.
The Credit Agreement contains covenants requiring the maintenance of a minimum consolidated fixed charge coverage ratio if excess availability falls below the greater of (i) $7.5 million and (ii) 10% of the revolving credit facility (currently $8.0 million). As of September 30, 2024, the Company was in compliance with all financial debt covenants. See Note 8 in the notes to the unaudited condensed consolidated financial statements for additional information on the Company's line of credit.
Share Repurchases and Dividends
We have a share repurchase program, authorized by the Company's Board of Directors, that is executed through purchases made from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. Shares repurchased are returned to status of authorized, but unissued shares of common stock or held in treasury. As of September 30, 2024, the Company has 462,685 shares of its share repurchase authorization remaining.
Shares repurchased for the three and nine months ended September 30, 2024 and 2023 were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Number of shares repurchased
42,623
44,799
74,186
95,955
Average price per share
$
9.79
$
8.87
$
9.92
$
9.38
Total cost of shares repurchased
$
418,563
$
398,861
$
738,361
$
903,012
At the end of each fiscal year the Board of Directors reviews the financial performance and capital needed to support future growth to determine the amount of cash dividend, if any, which is appropriate. In 2023, no dividends were declared or paid by the Company.
Other Financial Measures
Below are additional financial measures that we believe are important in understanding the Company's liquidity position from year to year. The metrics are defined as:
Liquidity Measure:
•Current ratio = current assets divided by current liabilities. The current ratio will be determined by the Company using generally accepted accounting principles, consistently applied.
Leverage Measure:
•Debt to capital = total debt divided by total capital. The debt to capital ratio will be determined by the Company using generally accepted accounting principles, consistently applied.
Profitability Ratio:
•Return on average equity ("ROAE") = net income divided by the trailing 12-month average of equity. The ROAE will be determined by the Company using generally accepted accounting principles, consistently applied.
Results of these additional measures are as follows:
September 30, 2024
December 31, 2023
Current ratio
3.8
3.7
Debt to capital
—%
—%
Return on average equity
(14.4)%
(38.6)%
Material Cash Requirements from Contractual and Other Obligations
As of September 30, 2024, our material cash requirements for our known contractual and other obligations were as follows:
•Operating and Finance Leases - The Company enters into various lease agreements for the real estate and manufacturing equipment used in the normal course of business. Operating and finance lease obligations were $33.3 million, with $1.7 million payable within 12 months. See Note 9 for further detail of our lease obligations and the timing of expected future payments.
The Company has no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on the Company's financial position, revenues, results of operations, liquidity, or capital expenditures. We expect capital spending to be as much as $0.8 million for the remainder of fiscal 2024.
Critical Accounting Policies and Estimates
We describe our significant accounting policies in Note 1, Summary of Significant Accounting Policies, in the notes to the consolidated financial statements presented in the Annual Report on Form 10-K for the year ended December 31, 2023. We discuss our critical accounting estimates in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Annual Report on Form 10-K for the year ended December 31, 2023. There have been no significant changes in our significant accounting policies or critical accounting estimates since the end of fiscal 2023.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act; therefore, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” is defined in Rule 13a-15(e) of the Exchange Act as “controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms.” The Company’s disclosure controls and procedures are designed to ensure that material information relating to the Company and its consolidated subsidiaries is accumulated and communicated to its management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2024. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2024, because of the previously reported material weaknesses in internal control over financial reporting, as described below.
Previously Reported Material Weaknesses in Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15f-15(f). As reported in our 2023 Form 10-K, we did not maintain effective internal control over financial reporting as of December 31, 2023 as a result of material weaknesses in the control environment and control activities areas. A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Refer to our 2023 Form 10-K for a description of our material weaknesses.
Ongoing Remediation Efforts to Address Material Weaknesses
Our material weaknesses were not remediated at September 30, 2024. Our Board of Directors and management are committed to the continued implementation of remediation efforts to address the material weaknesses. The Company has a remediation plan which includes designing and implementing review and approval controls over the data utilized in various accounting processes, controls that will address the accuracy, timely recording and completeness of data used in the determination of significant accounting estimates, reserves and valuations in accordance with U.S. GAAP, controls that will address the sufficient review of complex accounting areas and controls that will address the monitoring of general information technology areas including user access, cyber security and segregation of duties.
The following steps are among the measures being taken by the Company with a number of these initiatives directly related to strengthening our controls and addressing specific control deficiencies which contributed to the material weaknesses. The steps to remediate the deficiencies underlying the material weaknesses include:
•Engaging an outside service provider to assist management with the remediation efforts including to help review and make recommendations with respect to the redesign and implementation of our internal controls over general information technology controls, including user access provisioning, cyber-security and segregation of duties
•Enhancing/designing/implementing controls over the inventory, revenue recognition and accounts receivable, period-end financial reporting, account analyses, and journal entry processes
•Enhancing/designing/implementing controls over accounting for income taxes
The Audit Committee of the Board of Directors is monitoring management's ongoing remediation efforts. With the Audit Committee's oversight, management has dedicated significant resources and efforts to improve our internal control environment to remedy the identified material weaknesses. As we continue to evaluate and implement improvements to our internal control over financial reporting, our management may decide to take additional measures to address our control deficiencies or to modify the remediation efforts undertaken. Because the reliability of the internal control process requires repeatable execution, our material weaknesses cannot be considered fully remediated until all remedial processes and procedures (including additional remediation efforts identified by our senior management as necessary) have been
implemented, each applicable control has operated for a sufficient period of time and management has concluded, through testing, that the controls are operating effectively. Until all identified material weaknesses are remediated, we will not be able to assert that our internal controls are effective.
Changes in Internal Control over Financial Reporting
Other than the ongoing remediation efforts described above, there have been no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
PART II
Item 1. Legal Proceedings
It is not unusual for us and our subsidiaries to be involved in various unresolved legal actions, administrative proceedings and claims in the ordinary course of business involving, among other things, product liability, commercial, employment, workers' compensation, and environmental matters.. With respect to such lawsuits, claims and proceedings, the Company records reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. We cannot predict with any certainty the outcome of these unresolved legal actions or, in some cases, the range of possible loss or recovery. Information pertaining to legal proceedings can be found in Note 13 - Commitments and Contingencies in the notes to the unaudited condensed consolidated financial statements, and is incorporated by reference herein.
Item 1A. Risk Factors
There were no material changes in our assessment of risk factors as discussed in Part I, Item 1A in the Company's Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table sets forth information with respect to purchases of the Company’s common stock on a trade date basis made during the three months ended September 30, 2024:
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Programs1
Number of Shares that May Yet Be Purchased under the Program
July 1, 2024 - July 31, 2024
—
$
—
—
505,308
August 1, 2024 - August 31, 2024
22,056
10.11
22,056
483,252
September 1, 2024 - September 30, 2024
20,567
9.45
20,567
462,685
As of September 30, 2024
42,623
$
9.79
42,623
462,685
1Pursuant to the 790,383 share stock repurchase program re-authorized by the Board of Directors in December 2022. The stock repurchase program expires in February 2025 and there is no guarantee to the exact number of shares that will be repurchased by the Company over that period. See Note 10 for additional information.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
During the three and nine months ended September 30, 2024, none of the Company’s directors or executive officers adopted or terminated any contract, instruction, or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” (as those terms are defined in Regulation S-K, Item 408).
Cover Page Interactive Data File (formatted as Inline XBRL document and included in Exhibit 101*)
*
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed "furnished" and not "filed."
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
